Italian borrowing rates touch new record

MILAN - Italy's borrowing rates touched a new euro-era high Wednesday as a global market sell-off reignited fears that the debt crisis will engulf the eurozone's third-largest economy.

Prime Minister Silvio Berlusconi will address parliament on the state of the economy in the evening, but opposition parties called for him to step down, saying his lack of economic credibility in the markets was part of the problem.

Spain was also under the market spotlight, forcing Prime Minister Jose Luis Rodriguez Zapatero to delay his vacation by two days to monitor the market.

In a volatile day of trading, Italy's 10-year borrowing rate briefly spiked to 6.21 per cent before easing to 6.09 per cent, while Spain's edged down to 6.21 per cent from Tuesday's euro-era high of 6.45 per cent.

Both countries' yields have soared in recent days, suggesting investors are worried they may eventually need help with their debt.

"The upward march in Spanish and Italian bond yields is evidence of the relentlessness of the sovereign debt crisis," said Jane Foley, an analyst at Rabobank International.

The revival of the debt crisis is mainly due to a global sell-off by traders of any investments that appear risky — such as the bonds of Italy and Spain — after indicators suggested the U.S. economy is slowing sharply.

Whereas both Italy and Spain could continue borrowing at their current rates, their financing costs would increase, adding to the debt pile that is the source of market worries. The fear is that the global market turmoil will push the two countries closer toward needing a bailout.

Bailouts for Spain or Italy would be far more expensive than the rescue packages agreed for Greece, Ireland and Portugal and would likely overwhelm the eurozone's finances.

Last month, the leaders of the 17 eurozone countries agreed to changes to the region's rescue fund that would allow it to act pre-emptively, for instance by providing short-term loans or buying up ailing bonds on the open market, before a country is in a full-blown crisis.

However, actually implementing those decisions takes time, and in many cases the changes to the fund's powers will have to be approved by national parliaments, most of which are currently on summer break. At the same time, analysts worry that the fund is currently too small to make much of a difference.

European Commission President Jose Manuel Barroso said Wednesday that the selloffs of Italian and Spanish bonds "reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis."

Barroso said he would write to eurozone leaders and urge them to implement the decisions taken last month "without delay."

Germany, the eurozone's biggest member and traditionally an opponent of rushed moves during the crisis, sought to downplay the spike in market tensions.

Finance Ministry spokesman Martin Kotthaus said both Italy and Spain have set in motion reform programs — "and we believe that these extensive reform programs will convince the markets."

Last month, Italy passed a euro70 billion (US$99 billion) austerity package that aims at balancing the budget by 2014. But opposition parties, commentators, economists and the nonpartisan president have called for deeper reforms to encourage investment and growth and regain market confidence.

"At this moment, it is up to the political forces, both in the government and opposition, to work with civil society to make choices to decisively stimulate the indispensable growth of the economy and employment", President Giorgio Napolitano said in a statement.

As Berlusconi prepared to speak to parliament after the market close, Finance Minister Giulio Tremonti held talks with some of the currency union's top officials. He travelled to Luxembourg to meet Jean-Claude Juncker, who chairs the regular meetings of eurozone finance ministers, and spoke on the phone with the EU's Monetary Affairs Commissioner Olli Rehn.

The turmoil added political pressure on Berlusconi.

The main opposition party leader Pier Luigi Bersani said there was "global skepticism" of Berlusconi, while his deputy, Enrico Letta, said it was time for the premier to step down.

"He cannot be the one to propose solutions, seeing that he is a big part of the problem," Letta said.

Italy has debt nearing 120 per cent of economic output, but had been viewed for months with calm by bond markets. The country has low levels of private debt and has not had the real estate boom and bust that caused trouble for the United States, Spain, and Ireland.

But it suffers from chronically low growth and investors doubt the government's willingness and ability to push through painful economic reforms.

Spain, meanwhile, is struggling to recover from nearly two years of recession. The country is struggling with a swollen deficit and a jobless rate that stands at a eurozone high of nearly 21 per cent.

Zapatero delayed his vacation to monitor market developments, and was set to hold an emergency meeting with Finance Minister Elena Salgado and Development Minister Jose Blanco.

He called European Council president Herman Van Rompuy on Wednesday and they agreed that the new Greek rescue plan and the "reform of the European mechanism" to help eurozone countries should be approved as soon as possible by European governments to shore up confidence in markets, the prime minister's office said in statement.

Zapatero has called early general elections, largely due to pressure from the financial crisis and because he wants a new government to manage the troubled economy from the start of the year.

By mid afternoon in Europe, shares on the Milan Stock Exchangewere mostly flat, following several days of massive losses, while Spain's main index was 1.1 per cent higher.